With ECB chairman Mario Draghi stepping aside on October 31st/2019, making away for Christine Lagarde, many thought Draghi and the ECB would not announce drastic monetary decisions. Just sit on things until Lagarde takes the reins.
Today, Mario Draghi announced a deposit rate cut from -0.4% to -0.5% AND announced a new stimulus bond buying program at 20 Billion Euros a month. This stimulus is a way to counter recession signs…with Germany showing a slow down and quite frankly, may already be in a recession (lagging because of two consecutive quarters required).
Of course this announcement was commented on by President Trump:
” European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest! “
If you missed it, President Trump called for not just a 1% Fed rate cut but a cut all the way to 0 and less! Being the first US President to call for negative interest rates.
Again folks, if you follow my work, I have been saying this will be happening. Central banks are out of ammo and tools. They will be cutting rates and announcing stimulus and they will not call it QE because then people will realize what the game is: ZIRP and NIRP and stimulus forever.
In fact, many are already calling this new round of stimulus QEternity because the ECB will always be doing this. They cannot ever hike rates. People have gotten addicted to cheap money. It is a drug.
Expect more rate cuts to be coming from the Fed and other central banks. They are all inflating ( a race to the bottom to see who can weaken their currency) as a way to handle the large debt loads. I have spoken on why the Fed is cutting rates. A combination of geopolitics, handling and servicing debts, and to counter a recession. Expect cuts to zero and then into the negative.
The Keynesians cannot admit their policies have failed. Government does not mind because Keynesians call for government to get involved in the economy which means larger government and more taxes to feed it. It is a win win for the government and the bankers. The Keynesians say the reason their policies failed is because they did not cut rates deep into the negative enough and did not print enough money. They won’t admit their policies were wrong.
Negative rates do not work. It is shown that instead of spending money to not save and pay the banks for depositing money, people actually tend to NOT spend and save money for other reasons (saving for school, retirement, etc). This also means the real economy has not improved. The wealthy and those that know the laws of money and markets have benefited from this QE and low rates environment. Markets are propped by banks and there is nowhere to go for yield which has caused assets to rise.
Going forward we will see a confidence crisis and a social/economic crisis. Central Banks and government are choosing to INFLATE the debt meaning prices will rise due to more weak currency required to buy something. Living costs AND food stuffs will increase due to inflation. Throw in more taxes to pay for big government, and even negative interest rates meaning people pay the banks for keeping their money with them AND factor in real wages not increasing… you can see this crisis brewing.
Socialism will be seen as the solution. But all it does is creates bigger government which means more taxes to pay for all the programs… not the solution. It will make things even worse.
To end off, going back to the ECB, many are saying that the ECB will only be able to keep up this ‘Qeternity” for 6-18 months due to a confidence crisis that would occur due to large balance sheets. Once people realize this is the new norm, and we are heading towards a communist/socialist managed/controlled market with central banks being they buyers of last resort…we will see this priced into things such as Gold and Silver and perhaps Bitcoin.
I will leave with this chart:
Here is a 1 hour chart of the EURUSD.
When a central bank cuts rates and announces stimulus, it is the most extreme way to lower or weaken the currency. The other way being just plain rhetoric. Words and expectations moving markets.
You can see the Euro initially fell and then reversed erasing all the losses from Draghi’s announcement.
Essentially it did the opposite of what Draghi wanted the Euro to do. However, this can be seen as a sign telling us that the market already had this priced in. Rate cuts and stimulus are expected and they are coming.